Last week saw the FTSE100 post its biggest weekly gain since March, while markets in the US saw the S&P500 and Dow post their best weeks since November 2020, breaking a run of seven successive weekly losses, as well as wiping out the losses of the previous 3 weeks.
More importantly last week’s rebound saw the S&P500 close above 4,100, while the Nasdaq 100, and DAX broke out of short-term downtrends, a move that looks set to translate into a positive European open this morning.
It’s probably no coincidence that the rebound currently being seen in equity markets appears to be coming against a backdrop of a weaker US dollar, and declining US treasury yields, with the US dollar falling for the second week in a row, and the US 10-year yield for the third week in succession.
The reversals being seen in both the greenback and yields would appear to suggest that markets think the top is in for both, in the belief that inflationary pressure in the US may well have peaked in the short term.
The price action being seen in both bond and FX markets also seems to support that hypothesis, however sentiment in these markets has a tendency to shift quite quickly, while the price action being seen in commodity markets would suggest inflation still remains a real threat. The Refinitiv Commodity index last week pushed to its highest levels since September 2012, with oil prices finishing the week at their highest levels in two months.
The latest US PCE inflation data which the Federal Reserve uses to measure underlying inflation saw a decline in April, from 5.2% to 4.9%, the second month in succession it has fallen, having hit 5.3% back in February. This fall in PCE, while welcome, does feel a little bit of an outlier, however for now markets appear to be taking their cues from it, as well as comments from Atlanta Fed President Raphael Bostic, who suggested the Fed may well look at a pause in raising rates after the next two 50bps moves that are expected in June and July, if the data supports it.
As we look ahead to this week’s market action, and the end of the month, which may well have played a part in last week’s strong performance, we are likely to see a continuation of the choppy theme, with US markets off today, and UK markets off for an extended two days on Thursday and Friday for the Queen’s Platinum Jubilee.
Today’s key macro announcements are the preliminary German CPI numbers for May, which are expected to show that inflation move to 8.1% on the EU harmonised measure, and from 7.4% to 7.6%, on the headline measure, adding fuel to the fire that the ECB is well behind the curve when it comes to its own rate hiking cycle.
We’ll also be hearing from the Federal Reserve governor Christopher Waller, who has been one of the more hawkish members of the FOMC in recent weeks. In comments made earlier this month he said that it's time to “hit it” on raising interest rates, “front load it, get it done”
While he isn’t expected to resile from that hawkish narrative it will be interesting to see if he’s open to the option of a possible pause, in a similar vein to Bostic’s comments last week.
EUR/USD – currently testing trend line resistance from the highs this year, as well as the 50-day MA, currently at the 1.0780 area, a break of which could see a move towards 1.0850. We currently have support at the 1.0530 area.
GBP/USD – looking to move above the 1.2630 area, and towards the 1.2830 level. Only a move below 1.2550 undermines the case for further sterling gains. Below 1.2550 argues for 1.2470.
EUR/GBP – currently finding support at the 0.8480 area with resistance at 0.8530. Still range bound within the wider range of 0.8200/0.8600. A move through 0.8470 retargets the 0.8420 area.
USD/JPY – currently holding above the 50-day MA, with a break potentially opening a move towards the 123.00 area. We currently have resistance at the 128.30 area, as well as trend line resistance from the highs this month currently at 127.80.